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Here’s a basic explanation of how it works

A forex quote consists of a currency pair. Forex deals always involve simultaneously selling one currency and buying another. It includes a bid price and an asking price. For example, one quote might be USD/JPY 118.71/75.

The first currency is the base currency, and the other one is the quote currency. The value of the base currency is always 1. In this case, 1 U.S. dollar. The number tells you how much of the quoted currency (the Japanese yen, in this case) you can buy with $1.

But what kind of number is 118.71/75? It’s actually forex shorthand for two numbers: 118.71 and 118.75. The lower number is the bid price, and the other is the asking price. The bid price is the price that dealers will buy the base currency for, while the asking price is what dealers will sell it for.

So if the above were the current quote, it would mean right now, you could SELL U.S. dollars in exchange for 118.71 yen per dollar. Or, if you prefer, you could BUY U.S. dollars at a rate of 118.75 yen per dollar.

The difference between the bid price and the asking price in a Forex quote is called the “spread,” and those tiny units are called “pips.” In our example, the spread for USD/JPY was four pips. The spread is usually that small for the most commonly traded currencies, such as the U.S. dollar, Japanese yen, Great British pound, the euro, Swiss franc, or Australian dollar. In fact, thanks to the great competition in the forex trading market, some quotes will have a spread of as little as one pip.

Of course, for less commonly traded currencies, the spread can be much greater. Even when the quote delivers a small spread, it adds up when you’re trading hundreds of thousands of units. If you were dealing with 100 U.S. dollars, the difference between selling them for 11,871 yen and buying them for 11,875 yen wouldn’t be much at all, just four yen. But if it were 100,000 U.S. dollars, suddenly that four-pip spread means a 4,000-yen difference. Therefore, the spread in a quote is more important than its smallness would suggest.

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